The simple answer is that the gift is not income to your child.
"Gifts and inheritances. In most cases, property you receive as a gift, bequest, or inheritance isn’t included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that
income is taxable to you." IRS Pub. 17 at pg. 93.
Most, if not all, deductions have a reciprocal income reporting obligation on the part of the payee, for example you pay a surgeon 20K for an operation, she then needs to take 20K as income. Another example is of alimony, which is deductible by the payor and income to the payee.
Gifts fall into category of "revenue nuetral." Does, however, reduce your gross estate for estate taxes, but I am sure this is of little solace now.
